If Your Company Sinks, Don't Go Down with the Ship

There are times when, no matter how hard we try, things just don't work out. Basements flood. Cherished possessions break. Businesses fail. That is the reality of life, especially in challenging economic times. When a business is formed as a corporation, the law generally protects the owners from the reach of the company's creditors...generally. But there are times when the owners, officers and directors of a corporation can be subject to personal liability.

Previous issues of the Litigation & Counseling Alert have discussed some of those risky situations. A recent Illinois Appellate Court case highlights yet another area of potential risk for business owners. In Marsha Forsythe-Fournier v. Isaacson, the Illinois Appellate Court considered what type of activity the officers of a dissolved corporation can undertake in winding up the affairs of their company without subjecting themselves to personal liability.

In that case, the company was in the midst of fulfilling a construction contract when it became financially unable to continue as a going concern. Even though the company was formally dissolved, the officers decided to finish the construction project, presumably in order to get paid. After completing that work, the defunct company ceased doing business altogether.

As you can probably guess, the story does not end there. The owner of the property discovered a construction defect and sued the officers personally, claiming that they were liable because they continued to do the work after the company had been dissolved. Fortunately for individuals, the court disagreed. What saved the officers in this case was that they did not begin any new work after the company's dissolution. Rather, they simply finished a project that was already under way. That being the case, the court found that the individual officers were simply "winding up" the affairs of their former company, which they had the right to do under the law. Winding up a dissolved corporation is legitimate; starting and continuing new business is not.

So the lesson here is clear. If you find yourself in the unenviable position of closing down your business, there are a few simple ways to reduce your individual risk. Once your company has been dissolved, you have the right to wind up any work you have already started. You can complete old projects, honor existing contracts and so on, but you cannot start anything new.

With proper planning, good business advisors and a little bit of luck, you may never find yourself in that situation. But if you do, remember that even the most successful entrepreneurs have to start over from time to time.

Anthony C. Valiulis is an accomplished litigator with experience in a broad range of state and federal civil trial and appellate matters. Tony's practice encompasses complex business and financial litigation, concentrating in four major areas: (1) business disputes, including non-compete agreements, (2) insurance coverage, (3) appeals and (4) class action defense. He can be reached at 312.521.2691 or tvaliulis@muchshelist.com.